Turkish lira at new low, central bank seen sticking to playbook

FILE PHOTO: A gold dealer counts Turkish lira banknotes at his shop at the Grand Bazaar in Istanbul, Turkey, August 6, 2020. REUTERS/Murad Sezer

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SULAIMANI — The Turkish lira drifted further into record low territory on Monday (September 21) and touched 7.58 against the dollar, as expectations grew that the central bank would hold rates steady this week but continue to tighten credit via the backdoor.

Analysts at Goldman Sachs and elsewhere said the bank would likely raise the highest of its three main rates, the late liquidity window (LLW), from 11.25% at its policy meeting on Thursday, according to Reuters.

That could help protect the lira - which is down nearly 22% this year - from a more dramatic fall but probably only delay a formal hike to the 8.25% key policy rate TRINT=ECI, they said.

The currency TRYTOM=D3 was at 7.584 at 0745 GMT, slightly weaker than last week's close. It is among the world's worst performers this year in part due to aggressive monetary easing over the last year that left real rates deeply negative.

The bank is reluctant to restrict growth just as the economy is recovering from a nearly 10% contraction in the second quarter due to the pandemic. It also expects inflation to dip, though price rises have remained stuck in double-digits.

While economists polled by Reuters expect no formal hike this week, they predict the central bank will continue to take steps to raise the weighted average cost of funding CBTWACF=, which has climbed to 10.4% from 7.3% in two months.

Kevin Daly at Goldman Sachs said the bank would likely raise the LLW to 12% given the combined pressure of depleted reserves, the hit to the tourism sector, and Turkey’s heavy external loan payment schedule through year end.

Ehsan Khoman at MUFG Bank forecast a rise in LLW to 11.75%. “The main risk ... is that the authorities tighten policy too little and too late as they prefer to remain supportive of growth, a policy course which would add to the risks around the lira,” he wrote.

(NRT Digital Media/Reuters)